The impressive economic recovery in emerging Europe over the past five years has presented enticing opportunities in banking sectors across the region. For the most part, however, capital constraints have prevented the big regional players from taking advantage of these developments.
The exception is OTP Bank. Since 2014, the Hungarian national champion has added four banks to its network in south-eastern Europe (SEE), as well as acquiring the retail portfolio of Axa Bank in its home market.
Laszlo Wolf, the bank’s deputy CEO, says this dynamic acquisition strategy was driven partly by a desire to capitalize on robust economic growth across the region – all but two of the banking group’s nine countries of operation are expected to see GDP expansion of more than 3% this year – and partly by the need for scale.
“We don’t want to stay a small bank in any of our markets,” he says. “We have to reach a critical size in order to achieve strong and sustainable profitability.”
The fact that OTP Bank was able to embark on an ambitious M&A programme at a time when regional rivals were pulling back was due to its ample capitalization.
Even after a 15% increase in dividend payments last year, as well as the closure of purchases of Splitska Banka in Croatia and Serbia’s Vojvodjanska Banka, the group’s CET1 ratio stood at 14.6% and its CAR at 16.5% at end-June.
“The excellent profitability of OTP Group also contributes to continuous capital generation, providing solid foundations for further acquisitions,” adds Wolf. In the first half of 2018, group net profit equated to 1.7% of risk-weighted assets.
Two more acquisitions are already in the works. In August, OTP Bank announced the purchase of the Bulgarian and Albanian subsidiaries of Société Générale, which is disposing of non-core assets across Central and Eastern Europe (CEE).
Bulgaria has been profitable for OTP Bank since it entered the market in 2003. Today, DSK Bank is one of the group’s main revenue generators and the country’s second-largest lender. The acquisition of SG Express, a universal bank with a market share of 6.7%, will further strengthen the banking group’s market position in Bulgaria.
“We have purchased a superb bank which we consider to be yet another milestone in the activity of OTP Bank,” says Wolf. “The transaction clearly signifies how much faith and trust we have in Bulgaria’s development.”
The purchase of SG Albania, meanwhile, represents the banking group’s first foray into a new market since the financial crisis. The lender, which ranks fifth in Albania by total assets, has a market share of 6% and 38 branches.
“With this acquisition, OTP Bank is entering a banking market with low loan penetration and high margins, which provides a unique opportunity for growth in the long term,” says Wolf. “Albania is also one of the only countries in CEE with positive demographics, which adds to the promising market outlook.”
Even after these purchases, Wolf says OTP Bank will continue to look for further acquisition targets both within and beyond its current countries of operation. “We believe in the future of CEE and wish to actively contribute to its progress,” he says.
In addition to its excellent capitalization and liquidity, OTP Bank’s ample experience of integrating newly acquired banks – supported by the creation of a dedicated integration unit based in Budapest – gives the group a competitive edge in the M&A market, Wolf adds.
Since 2014, OTP Bank has successfully integrated two smaller lenders – Banco Popolare in Croatia and Millennium Bank in Romania – while the integration of Splitska Banka is expected to be completed by the end of the year.
While M&A has been a key driver of OTP Bank’s expansion in recent years, organic growth has also been robust. Last year, acquisitions boosted the group’s consolidated lending by 15% but a further 10% was due to organic growth.
This outperformance has been helped by favourable macroeconomic conditions but it has also received a significant boost from OTP Bank’s recent investment in digitalization.
The group has a strong track record of innovation. In Hungary, OTP Bank pioneered the use of bankcards and ATMs, and was also the first lender to develop a smartphone application. Building on this strong foundation, the bank launched a comprehensive Digital Transformation Programme in 2015.
“The main objective of our developmental strategy is to provide a seamless user experience for our clients through the digitalization of products and services, and the simplification of processes,” says Wolf.
The first phase of the initiative, which has focused on Hungary, has already produced impressive results. Over the past three years, OTP Bank has completed 25 digital projects, including a revamp of its mobile banking offering, the introduction of online sales of cash loans – which now account for 20% of new loan production – and the launch of eBiz, a digital platform for SMEs.
Today, more than one million of the group’s Hungarian clients bank online and more than 250,000 use mobile banking.
OTP Bank has also expanded its offering beyond classical banking products with the launch of Simple, a digital ecosystem integrating multiple financial and non-financial services. As well as a payment platform for the purchase of movie tickets, books, food, taxi services and parking, the facility also offers services such as loyalty card management.
“This solution helps OTP Bank to attract young customers and increase the wallet share of the bank,” says Wolf. “It acts as a one-stop interface for clients, which allows us to become the owner of the client relationship.”
The group is also focusing on the use of big data analysis to keep pace with the changing demands of clients, as well as the use of new methodologies to streamline internal processes.
Wolf is confident that OTP Bank’s digital strategy will equip the group to meet the challenge not only from traditional banks but also from disruptive players such as big tech companies.
“We believe OTP Bank is very well positioned to stand out on the market, not only due to its financial capabilities, but also due to its proven track record and know-how in developing innovative solutions to enhance customer satisfaction and efficiency of internal processes,” he says.
He is keen to stress, however, that the group has no plans to abandon its physical branch network, in Hungary or elsewhere.
“Some banks attempt to remain cost-effective through the closure of branches,” adds Wolf. “We believe that high-quality branch services catering to the comfort and satisfaction of clients will remain a definitive element in the operation of a successful universal bank.”
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